Almanac Investor Alert
Ease Me In 1/10/2008
Weekly Changes
DOW 12853.09 -203.63 -1.56%
S&P500 1420.33 -26.83 -1.85%
NASDAQ 2488.52 -114.16 -4.39%
Fed Chairman Bernanke reassured The Street today that the Federal Reserve would be aggressive and proactive in its actions to resuscitate the ailing U.S. economy. Bernanke’s calm demeanor and candid assessment of the threats to the economy made it clear that more rate cuts would be supplied as needed.
While Wall Street digested Mr. Bernanke’s comments the market vacillated above and below the flat line until the news broke that Bank of America was in talks to buy the failing mortgage concern Countrywide. This breathed life into the stock market, pushing prices higher for the day.
Though this renewed confidence may rally stocks in the short term, we remain concerned that before the economy rights itself and before the market is off to new highs, further downside action is likely and that the potential for a full-blown bear market and recession is elevated.
In the upcoming issue we will be detailing market behavior during Fed easing periods. Eleven of the last twelve easing periods have proved to be tumultuous times for the markets.
Last week Santa failed to make an appearance and earlier this week our First Five Days Early Warning System (FFD) registered a negative reading with the S&P 500 down 5.3% for the first five trading days of 2008. This FFD was the worst on record. However, the 22 down First Five Days since 1950 were followed by 12 up years and 10 down (less than 50% accurate).
In Election years, the FFD indicator has a record of 12 and 2. Both errors were when the First Five Days were down. However, when FFD is down during uncertain economic conditions and in overextended markets as we are in now, the market has been much weaker (2008 Stock Trader’s Almanac, page 14).
The full-month January Barometer has a 10 and 4 record in Election years. At the end of the month when we have the final official January Barometer reading, we should have an even better picture of what to expect from the market in 2008.
In addition to these early negative readings, the Dow closed below its December closing low (on Jan 2) and continues to trade below it. Since 1950, 27 of 29 occurrences saw continued declines with and average loss of 10.1%.
Also, the historically bullish months of November and December were both down. This has occurred eight times since 1901. Six times the market was in a continuing bear market nearing its end in the next year. In the other two occurrences bear markets bottomed before the end of that year (October 1966 and December 1974).
As long as Bernanke and Co. hold sway over the market, a bear market can be averted. The FOMC meeting kicks off on January 29 with a Fed decision the following day. If Mr. Bernanke can soothe what ails the markets, we should be in good shape for at least the short term. If the markets turn their back on him, watch out below!
STANDARD TRADING GUIDELINES!
BUY LIMITS ARE GOOD TILL CANCELLED.
ALL STOPS EFFECTIVE ONLY WHEN THE STOCK CLOSES BELOW THE STOP PRICE.
ALWAYS SELL HALF ON A DOUBLE.
Please Trade Carefully.
Jeffrey A. Hirsch, Editor
J. Taylor Brown, Director of Research
